The confusion between the correlation and causation is inevitable especially for those who are new in investment and trading. But one must understand the difference between correlation vs causation before opening any investment accounts. The financial analytics bible defines the correlation is a relationship between markets.
For instance, FBMKLCI and DJIA have a positive relationship. But without further statistical test, we cannot say which market is the leader and which market is the laggard. Both markets may share and react on the similar information which is the mediator. So there comes the need of another course of test called causality test. The causation, for example, explains the case when FBMKLCI causes DJIA to move.
The mathematics of assets correlation is simple and straightforward. The correlation test finds the degree of association between the price change of Asset A and Asset B. It is then measured by a statistical tool such as Pearson Correlation coefficient. The causality test on the other hand adopts the similar mathematical formulation but with a little adjustment on the equation parameterization.
Correlation VS Causation
The causality test focuses on finding the correlation of Asset A and Asset B with each other’s history. The most popular causality test used in the Bloomberg terminal is Granger causality test.
The knowledge on assets correlation and causation is crucial for investors as it helps the investors to differentiate and identify market movers. Some of the assets maybe well correlated but not necessarily a price determinant to each other. For instance, the most popular assumption in the agricultural commodity trading is the soybean oil futures traded in US Chicago Board of Trade (CBOT) is the leader for the Malaysian crude palm oil futures (FCPO) in Bursa Malaysia Derivatives (BMD).
A study by Li and Nguyen (2015) provide a crucial piece of evidence where they reveal that the CBOT soybean oil and BMD crude palm oil have a stable long run relationship, but the study discovered that there is bi-directional causality between both futures markets. It shows that the Malaysian crude palm oil price may influence the soybean oil price in the US and vice versa.
Futures Market
Another example, the causality test determines the functionality and reliability of futures market as a hedging avenue for the market players. The futures market is established to be a future price reference for its underlying cash market. The efficient futures market guarantees effective hedging strategy. Therefore, an efficient futures market must have two conditions to be fulfilled.
First, the correlation between the spot and futures must be at perfect positive at all times. Secondly, the futures price must be proven leading the spot price in the causality test. Lacking on any of these prerequisites may render the price risk transfer process from the hedger to speculator to be less efficient. To add further, the causality test helps the global investors in devising their international portfolios.
A good knowledge in cross markets causality will tell whether the bearish mode in the S&P500 tonight maybe spill over to Nikkei 500 in the next morning or not. This is why it is important to have the knowledge about correlation vs causation.
So, the next time you heard an impactful news on a geo-economic event, you can tell that if your portfolio will be impacting or impacted by the global sentiment. Hope you now have a better understanding of correlation vs causation.
About the Author
Dr. Ahmad Danial is a Certified Financial Technician (CFTe) and Senior Lecturer in Finance at Department of Economics and Financial Studies, UiTM Puncak Alam. He has over 10 years’ experience in the financial markets before hopping into the academia. His areas of expertise include financial contagion, trading in stocks and derivatives markets, price discovery, hedging strategy, Econophysics and technical analysis. He can be reached at danialzainudin@uitm.edu.my.
Malaysia became the first country in the ASEAN region to regulate P2P financing with the registration of six P2P operators with the Securities Commission Malaysia (SC) in 2016 – B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures and Peoplender (Fundaztic)–which were fully operational by 2017. Since then, a few more operators launched their platforms including Cofundr in July 2020 and microLEAP in October 2019.
The question in our minds, it it worth investing in P2P financing?
What Is P2P Financing?
The Peer-to-peer (P2P) financing aims to address funding needs of SMEs to raise working capital or capital for growth. It is also recognised as one of the alternative investments that one can consider which come with different risks and rewards. Nevertheless, an investment still serves the same purpose; to gain profit and to hedge against inflation.
Number of campaigns and amount raised by year. Source: SC
Based on the data from 2017 until 31 March 2022 by the SC, the total amount raised from P2P financing was RM2.62 billion, with 35,499 campaigns and 32,925 investors. Thus, P2P financing has been a major contributor in helping SMEs to fund their current operation and expand their businesses.
Of the investors, mostly (86.7%) are retail investors, with 7.9% angel investors while high-net-worth (HNW) individuals and HNW entities made up the balance.
Type of P2P Financing investors. Source: SC
Smart Investor talks to several industry experts to find out more about P2P financing and investing in P2P financing.
Alternative Financing Through Crowdfunding
Paul Kuan, chief executive officer of Cofundr says that P2P financing is a platform to finance SMEs by raising funds via the internet. The investors will invest in a portion of the financing known as investment notes for a risk-rated return.
Paul Kuan, chief executive officer of Cofundr
He informs that in every P2P financing, there are three parties involved; the issuer (SMEs), investors and facilitator (the P2P platform such as Cofundr) to facilitate the entire P2P ecosystem.
“In layman terms, P2P financing is a form of alternative financing through crowdfunding which enables businesses to obtain loans directly from individuals, facilitated through a P2P financing platform, cutting out financial institution as the middleman,” adds Jeff Tan, acting chief executive officer of Peoplelender Sdn Bhd that manages the P2P financing platform known as Fundaztic.
Jeff Tan, acting chief executive officer, Fundaztic
“P2P operator facilitates businesses to raise funds from both retail and sophisticated investors through an online platform. Through the SC’s registered platform, an investor may invest in an investment note issued by businesses for a specified tenure with the expectation of a predetermined financial return,” Er Chiang Chuan, head of business development and operations for B2B Finpal, explains.
Er Chiang Chuan, head of business development and operations for B2B Finpal
He adds that with a sophisticated risk algorithm and extensive SME experience, B2B Finpal ecosystem helps to connect those underserved SMEs with investors for quick and easy financing access.
Percentage of issuers who have successfully and unsuccessfully raised funds. Source: SC
From 2017 until Q1 2022, 99.4% of issuers have successfully fundraised. It shows that the chance of getting successful financing through P2P financing is very high.
How can someone raise funds for their businesses through the P2P platforms? Will it be difficult with stacks of documents needed to be provided?
Tan briefly shares that for businesses, the general procedure is to ensure that they meet the required criteria in place by the P2P platform. When an issuer applies for funding, the P2P operator will evaluate the issuer’s eligibility, among others, by assessing its capacity to repay through credit history checks and analysis of any alternative data.
“As a fintech P2P platform, all onboarding procedures are being done via our website or mobile app. This applies to both issuers looking for financing as well as investors looking for investment opportunities,” Kuan responds.
“microLEAP also provides value-added services, such as Free Personal-Accident (PA) Insurance on the business Key-Person, online video tutorial on basic debt management and accounting in both Malay and English, as well as absorbing all Shariah-related fees,” adds Marzuki Musa, chief marketing officer of microLEAP.
Marzuki Musa, chief marketing officer of microLEAP
Each P2P financing platform may have different registration and application process. Er provides us the general overview of how they work:
1. Sign up on the P2P platform The issuers are required to provide business information and documents such as the nature of their business, contact details, financial information, directors and shareholders information, etc.
2. Verification and approval by the P2P financing platform The P2P operator will evaluate the issuer’s suitability, among others by assessing its capacity to repay through credit history checks and analysis of any alternative data.
3. Execute the issuer agreement Once the issuers have accepted the offer and executed the issuer agreement, their funding request will be published on the P2P financing platform and investors can choose whether or not to fund their business.
4. Receive funds The funds will be credited to the issuer’s bank account once it has reached the target amount set earlier during the application.
Investing In P2P Financing, Knowing Your Risk Appetite
Generally, for those interested in investing in P2P financing platform’s investment notes, they will first have to open an account with the respective platform and provide information such as their name, address and contact information for the operator to carry out identity verification and undergoes the Know Your Customer (KYC) process.
According to Er, the process is important to protect the investors and P2P operators from misuse of data and it is also required by the law. But what are the criteria or guidelines that an individual need to consider before investing in P2P?
Marzuki shares that there is always an element of default risk when it comes to investing in P2P financing market.
“Hence, microLEAP encourages all investors to diversify their risk by investing in as many investment notes as possible for a given amount of funds,” he says.
microLEAP is a Shariah-compliant and conventional P2P financing platform that provides alternative financing for MSMEs, that is funded by both investors who are looking for a Shariah-compliant yield as well as impact investment.
“P2P financing indeed provides higher returns than traditional investments, but investors take on higher risks as well,” Er concurs.
He adds that investors need to be aware that the returns from investing in P2P financing are not guaranteed. “The issuers may default on their P2P financing and might not be able to repay their monthly dues to investors. In the event of a default, some platforms may take legal action against defaulted issuers or work with them to propose alternative repayment solutions.”
Furthermore, risk appetite is different for every investor. It is tempting to go for higher-risk businesses that provide higher returns, but Er emphasizes the need to ask yourself on what you can stand to lose if they default on their payments.
“To further help investors, Cofundr uses Factsheet that contains the company background, years established, business sector, litigation status of the company and if the company has been blacklisted before.
However, at Cofundr, we practice a “noname” basis where we do not reveal the issuer’s name. This is to protect the Issuer’s confidentiality,” Kuan shares.
Compared to conventional investments such as equities, unit trust or fixed deposit, is there a safety net for investors that are investing in P2P Financing? Or is there a potential to suffer a total loss from capital? As such, how would an investor mitigate the risks?
“Diversifying your portfolio is by far the best strategy to minimise any risks or losses you may encounter in the long run. To diversify means to spread your investment across as many notes as possible in terms of number as well as type of issuers,” Tan says.
The biggest risk in investing in P2P financing is repayment or default risk where the issuer might not be able to repay the fund in full.
“To mitigate the risk for our investors, our credit assessment team is very selective with the issuers we onboard and we often make an arrangement such as guarantor arrangement, assignment of proceeds, post-dated cheques and others to rotect our investors. Investors can suffer losses when investing in P2P financing. Hence, we always advise investors to diversify their investment into several investment notes rather than focusing on just one,” Kuan further adds.
Going Forward
On what are the future plans for the P2P financing industry players, here are what they share.
“We aim to elevate the financial well-being of the communities through P2P financing. We also plan to offer more dynamic products for both the issuer and the investor. Recently, we launched our Shariah-compliant products, Takaful Contribution Financing and Islamic Invoice Financing to serve the Islamic market in the P2P ecosystem,” Kuan shares on the plans for Cofundr.
“We will also continue to educate the public about P2P investment and how it can become an alternative investment asset class for them to consider when building their wealth,” he adds.
“After establishing ourselves in several states in Malaysia, we will look to expand regionally. microLEAP’s plans to branch beyond Klang Valley and increase our presence in other states such as Negeri Sembilan, Johor, Sarawak and Sabah,” Marzuki informs.
B2B Finpal expects to see a V-shaped recovery as consumers start to spend again after the recent COVID-19 pandemic that has hit businesses very hard. “B2B Finpal will be ready to support the recovery of Malaysian SMEs,” Er says.
As for Fundaztic, Tan informs that they will expand their sales force to other states to make Fundaztic accessible to all MSMEs across Malaysia. Fundaztic has also expanded to Singapore since last year and they are now exploring further expansion to other countries as well.
Now that you know more about the P2P financing and have heard from the industry players, do you think that investing in P2P financing should be considered as one of your alternative investments?
The month of October is that time of the year where the financial planning profession come together to raise awareness of financial literacy and financial planning in Malaysia among the public.
Vincent Kwo, President of the Malaysian Financial Planning Council (MFPC), weighs in on the state of financial literacy and financial planning in Malaysia, why one should engage a financial planner and what MFPC is doing to uphold the best standards of practices in the industry.
Vincent Kwo, President of the Malaysian Financial Planning Council (MFPC)
Smart Investor: Are there any recent initiatives, campaigns or events by MFPC to promote financial literacy and financial planningin Malaysia this year?
Vincent Kwo: The Malaysian Financial Planning Council’s objectives include promoting the development and enhancement of the financial planning profession in the country, as well as elevating financial literacy and financial planning in Malaysia.
To meet the first objective, we conduct professional financial planning programmes that lead to qualifications recognized by the Securities Commission (SC) and Bank Negara Malaysia (BNM). This ensures Malaysians access to the highest quality of financial planning services provided by qualified and knowledgeable financial planners.
As for meeting our second objective, we continually embark on various initiatives, conduct programmes and events for the Malaysian public at absolutely no cost to promote financial education. The aim of these initiatives – all of which are devoid of any commercialization – is to stay in the forefront to raise the financial literacy and financial planning in Malaysia for the rakyat, which is at a worryingly low level.
We are immensely proud that our initiatives have reached out to and benefitted thousands of Malaysians, empowering them with financial knowledge for their and their families’ financial well-being.
The first half of 2022 saw us hold four of our award-winning My Money & Me workshops virtually for youths in KL, the east coast zone, the northern zone and the southern zone. These programmes are a regular feature in our itinerary, which are evidence of our efforts in contributing to the rakyat’s financial well-being and ultimately advancing the development of the nation.
The workshops are cross-collaborative programmes with Bank Negara Malaysia, SC, OFS and SIDREC, EPF, AKPK, LIAM, MTA, FIMM, LHDN and MFPC.
The topics at our basic financial literacy My Money & Me workshops include asset protection, asset accumulation, asset management and asset distribution, vesting Malaysian youths with financial knowledge. The workshops will also empower youths to practise positive financial behaviour and gain strong financial capability well into adulthood and their retirement years, ensuring their financial and emotional wellbeing.
During the My Money & Me workshop in March, we launched an e-learning portal https://mymoney.mfpc.org.my/ with free access for the public. The self-paced learning available will ensure resources are available to build the financial knowledge of the public. The portal comprises of subjects related to conventional and Shariah financial planning.
In addition, we conducted numerous series of Pocket Talks covering financial planning topics, free for the public. These aim to raise public awareness of the importance of financial education and planning.
Raising Awareness Of Financial Literacy And Financial Planning In Malaysia
We have conducted 20 talks to date in conjunction with our MFPC Industry Talk with local universities. The talks are conducted in collaboration with financial planning firms, financial institutions and trade associations to promote the importance of financial planning, and to instil interest in financial planning as a profession in young adults.
In the pipeline are three more My Money &Me workshops for the year, for Sabah, Sarawak and Selangor.
Other programmes in the pipeline include an e-Tournament 2022 in October 2022 entitled Game for Money. 20 universities will participate in the event. The aim of the tournament in to provide financial education as well as to instil interest in financial planning among undergraduates.
We will also participate in Bersama InvestSmart® in Sarawak, in September. This is an event initiated by SC that seeks to create more informed investors who are self-reliant and able to make investment decisions that are right for themselves.
MFPC is confident that our numerous financial education programmes have made and will make a difference in the lives of Malaysians, enhancing their upward mobility and creating lasting and positive changes.
SI: What is your take on the state of financial literacy and financial planning in Malaysia, especially given the past couple of pandemic-fuelled years?
VK: The recent pandemic drove home the fact that financial planning and literacy are essentials, not options. Many people lost their income unexpectedly and matters were made worse for those who did not have a comprehensive financial plan.
Unfortunately, financial literacy and financial planning is very low among Malaysians, which worsened the financial problems brought on by the pandemic. MFPC’s various free financial education programmes to raise public awareness and literacy aim to aid the public to improve their situation.
We plan to continue working to this end, so many more Malaysians understand the importance of financial planning and education, and will be better equipped to withstand any similar circumstances that may arise. We look forward to working with our partners in the effort to improve the financial well-being and lives of the rakyat.
SI: Why does one need a licensed financial planner in their life?
VK: Various studies, including the Capital Market Development Fund (CMDF) report on Financial Literacy and Utilisation of Financial Advisory Services in Malaysia, reveal that Malaysians generally have a worrying low financial capability, do not know how to manage their money, and do not plan ahead. This does not bode well for their financial sustainability and makes them prone to falling into the bankruptcy trap, and become prey to loan sharks and get-rich-quick scams.
We recommend that one should have a complete financial plan for oneself, and if you don’t have a plan, to seek assistance from a licensed financial planner to develop a plan.
A licensed financial planner can help one to establish a personal financial plan, give measurable goals to work toward, track progress, reduce doubt about decision and make better financial decisions. This will help one to manage cash flow and manage debt efficiently.
Planning can be tailored to suit every personality type and meet different needs at different times of one’s life stages. A licensed financial planner can provide the necessary advice on changes and adjustments to support one’s lifestyle, resulting in peace of mind and general well-being.
SI: What should a person look for in a financial planner?
VK: It is most important that we seek the services of a licensed financial planner. A financial planner with the Registered Financial Planner (RFP) or Shariah RFP designation is licensed with Bank Negara Malaysia and the SC, and holds the Financial Adviser’s Representative (FAR) and Capital Markets Services Licence (CMSL) respectively. We can also check against the list of licence holders provided by Bank Negara and SC.
As for the other qualities, the following should be considered: trustworthiness, ability to provide evidence of a good track record of success, ability to provide independent advice, compatibility with the client, the ability to provide up-to-date information and the ability to refer to other specialists if required.
In short, one should look for professionalism in a financial planner. MFPC provides an evolving set of Best Practice Standards and Code of Ethics for adherence by our RFP and Shariah RFP designees. This is to ensure professionalism in financial planning services providers, prevent exploitation of clients, and to preserve the integrity of the profession.
This is also to ensure Malaysians will benefit from the highest quality of financial planning services. It demonstrates clearly the importance we place on ethical behaviour in the profession. At the same time, this will help in raising awareness of financial literacy in Malaysia.
The following story is based on an actual series of events with some names and circumstances fictionalised and any similarity to the name, character or history of any person is entirely coincidental and unintentional. Hope that this will help you understand the hard facts about the executor of a will in Malaysia.
Janet hates her husband! In a moment of anger out of frustration, the thought “why didn’t I die before you…” raced through her mind.
Tired and annoyed, Janet just couldn’t help taking it out on her late husband for the torture she underwent. For the umpteenth time this week she has been given the run-around from one Government department to another, to the bank, to EPF, to… only to be told that she doesn’t have the necessary documents or sorry, wrong department!
The Hard Facts About The Executor Of A Will In Malaysia
“Didn’t you know that the job of an executor of a will in Malaysia is that difficult?” she lashed out as if husband Keat was in front of her.
“How could you put me through this, you Mr Know All? You knew very well I’m useless in dealing with such stuff? Why? Why? Why are you so irresponsible…” her voice trailed off as she started to sob, shielding her face with her hands outside the Employees Provident Fund office.
Just slightly more than a month back, she lost her pillar of strength. It was cruel that Covid-19 had so suddenly taken Keat away and left her with their two little ones.
She recalled that she was numb with disbelief when she had to unceremoniously send-off Keat without a proper burial. She was allowed to watch only from a distance and say her last farewell as the casket was rolled into the furnace at the crematorium.
She was alone then and she had been alone mourning her loss after that as no one could visit her home as she and her kids were on home quarantine.
Janet didn’t know where she found the strength in those moments of grief. But now, as time heals, she felt like being dealt with another cruel blow.
The Pain Of Losing Loved Ones And Executing The Will
Little did she know what she had to go through as she started the process of executing Keat’s will. It was only after having a taste of it that she realised the folly of Keat in insisting that they keep things within the family and appoint each other as Executor of their respective wills.
It was torture which she as the surviving spouse would want to be spared. The question before her is would she be able muster any more strength to go through this while taking care of the children’s needs…?
The role of an Executor of a will in Malaysia is to carry out instructions in the will and ultimately distribute the assets to beneficiaries.
The process before assets can be distributed to the beneficiaries involves settling debts and liabilities, for example loans, credit card dues, and taxes, efficiently and without bias.
This can be an onerous task – complex and time consuming especially for the uninitiated as it involves legal, taxation, accounting and administrative matters such as tracing of assets, application for probate and attending court hearings as well.
Local government agencies and statutory bodies such as land office, EPF office, Inland Revenue will have to be dealt with depending on the assets left behind by the deceased. Then there are the banks, the credit card issuers, insurance companies, debtors, creditors, stockbroking firms, company secretary, accountants… the list goes on.
Huge Burden On The Executor
The person appointed as Executor of a will in Malaysia as such needs to have a wide knowledge in legal, accounting, tax and administration work to ensure that the process of applying for Grant of Probate, administration and distribution of assets is carried out smoothly.
Any undue delay in the distribution of the assets may be to the detriment of the beneficiaries who, due to the demise of their sole breadwinner, for example, may be in difficult financial situation with sudden loss of income.
As individuals with the necessary capabilities may be hard to come by, a prudent consideration is to appoint a trust company like Rockwills Trustee Bhd that have specialised in estate administration matters for decades.
The professional company will have experienced and skilled personnel with the time and resources on hand to administer to one’s estate and Trust. Unlike the individual executor, the company will exist in perpetuity thus averting any possibility of untimely death before or in the midst of carrying out duties of an executor.
Now you know what the executor of a will in Malaysia have to face?
About Rockwills International Group
Rockwills International Group, now in its 27th year, pioneered professional will writing in 1995 and has since evolved into the leading estate planning specialist in the country. It is today the largest provider of solutions and support services in the areas of trusts, succession, management and distribution of wealth. It has shareholders’ funds exceeding RM50 million. It has done over 280,000 wills and 15,000 trusts and hold more than RM25 billion in assets under trust.
We always hear about the rich helping out the poor and it is normally done out of compassion and as a way to express gratitude for all the blessings that one receives throughout his life.
Rather than getting rich and enjoying the wealth on your own, sharing it with others will put a smile on others and alleviate whatever ills and hardship that they are currently facing.
Are you still confused with the terms Zakat, Sadaqah and Waqf?
What Is Zakat, Sadaqah And Waqf?
Zakat
As one of the pillars of Islam, Zakat is a form of obligatory charity that has the potential to ease the suffering of others. With the literal meaning of the word being ‘to cleanse,’ Muslims believe that paying Zakat purifies, increases and blesses the remainder of their wealth.
It is a wealth tax and a means of wealth distribution, harmonizing the relationship between the individual and public interest. Each year, Muslims are required to donate 2.5% of one year’s total cumulative wealth to the poor in the form of Zakat.
There are eight categories of zakat recepients as stated in the Al-Quran.
Those living without means of livelihood
Those who cannot meet their basic needs
To zakat collectors
To persuade those sympathetic to or expected to convert to Islam, recent converts to Islam, and potential allies in the cause of Islam
To free from slavery or servitude, slaves of Muslims who have or intend to free from their master
Those who have incurred overwhelming debts while attempting to satisfy their basic needs, debtors who in pursuit of a worthy goal incurred a debt
Those fighting for a religious cause or a cause of God, or for Jihad in the way of Allah by means of pen, word, or sword, or for Islamic warriors who fight against the unbelievers but are not salaried soldiers.
Wayfarers, stranded travellers, travellers who are traveling with a worthy goal but cannot reach their destination without financial assistance
Waqf
It involves donating a fixed asset which can produce a financial return or provide a benefit. Is is an endowment to a religious, educational or charitable cause, most frequently used to build schools, hospitals or religious institutions. Given its communitarian nature, Waqf is often used to fund social projects and services.
It literally means to stop, contain, or to preserve. This philanthropic activity has become one of the catalysts for Muslims’ economic activities over the centuries including Malaysia.
Sadaqah
Sadaqah means voluntary offering, whose amount is at the will of the “benefactor”. It is voluntary charity given on an ad-hoc basis; a concept similar to putting coins into a charity donation box.
Giving Sadaqah does not mean being rich and able to give money to the poor and needy. There are many types of Sadaqah.
Spreading knowledge is Sadaqah
Sharing food is Sadaqah
Giving your time and energy to a good cause is Sadaqah
Saying a kind word, even smiling is also considered as Sadaqah
Still Confused With Zakat, Sadaqah And Waqf?
Zakat is the obligatory form of charity, whereas Sadaqah is voluntary.
For example you make a profit of RM50,000 from your investment for the year 2021, therefore you need to pay zakat of 2.5% of the total profit, which is equals to RM2,500.
But it is up to you how much you want to give for Sadaqah. You can also choose not to give Sadaqah.
Whereas Waqf is losing the ownership and management of the property/wealth from the giver to be used for a good purpose or the profit from it, to be used for a good purpose.
For example you have a empty house. You give permission for an administrator to manage the house to rent it out for free to students. Or if you allow the administrator to rent out the house, then the monthly rent is being used for a good cause.
Hope you now have a better understanding of what Zakat, Sadaqah and Waqf is all about, as well as its differences.
Smart Investor recently have the honor to interview Yang Berhormat Syed Saddiq bin Syed Abdul Rahman, the Member of Parliament for Muar. There were lots of very insightful and powerful thoughts that are outside of the box which can be used to power Malaysia into the future.
Among other things, he also shares with us 3 tips for the youths in Malaysia.
3 Powerful Tips for the Youths in Malaysia
1. Don’t Be Afraid To Make Mistakes
“Young people today are expected to work two or three different jobs to earn a decent living as the average wage has stagnated for the past ten to 20 years, while inflation has only gone up.”
– Syed Saddiq
We will be making a huge mistake if we stand still, whereas others are making progress by leaps and bounds.
“The fear to even begin doing something because you are afraid to make mistakes, makes you suffer from paralysis analysis,” stresses Saddiq.
We can afford to make mistakes when we are young, as there is ample time to learn from them.
2. Invest In A Good Mentor
Mentor is an experienced person who has gone through lots of trials and tribulations. By having a mentor, we can take a shortcut and learn the tips and tricks, while avoiding the mistakes.
A mentor will be able to hand-hold you through the journey, mingle and learn from their networks, and learn directly from their experience which is invaluable. By investing in a good mentor, you can accelerate your progress by 10 to 20 years, as compared to earning a high salary.
3. Think Outside The Box
Being young doesn’t mean you have to follow the steps of previous generations that makes them successful. You will have to compete with others who have more experience and stronger capital, which inevitably causes you to be more creative to take on the giants in the industry.
This is where you need to be disruptive and use ways that were unimaginable previously. Even though the journey is hard, this is an important recipe of success.
“It is about using unconventional methods to achieve conventional outcomes,” quips Saddiq.
There you have it, 3 tips for the youths in Malaysia. It is our hope that Malaysia will improve by leaps and bounds, powered by the younger generation.
This is one of the most heated debate in the financial industry, saving vs investing. Before we get into it, let’s first take a look at the definition of saving and investing.
“Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs.”
-Wikipedia
Saving is your income, either from your monthly salary or sales commission, being put aside somewhere. This could be in your savings account or cash.
“Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.”
-Wikipedia
Whereas investing is putting in your money in an instrument where you can watch it grow. The longer you invest, the bigger returns from your investment.
Saving vs Investing
As you can see from the above, you won’t be able to invest if you don’t have money in the first place. Which also means that if you don’t have any savings, then you can’t invest.
And did you know that according to statistics, 75% of Malaysians can’t even come out with RM1,000 for any emergency? The culture of saving is sorely missing in our community.
In case anything untoward happens such as meeting with an accident, car repairs, or dengue fever which requires hospitalization, then you may have to resort to borrowing money from family members or friends. Worse if there’s no one to help, then you turn to ‘ah long’ and be trapped in a vicious cycle.
So in the case of saving vs investing, make sure you have sufficient savings first.
RM5.2 Billion Lost To Scammers
According to the Inspector-General of Police, Tan Sri Acryl Sani Abdullah Sani, there were 71,833 fraud cases recorded since 2020 until May 2022, with a loss amounting to RM5.2 billion.
Hang on a minute, but didn’t you say that Malaysians don’t save but they have tons of money to invest, and ultimately gets scammed in the process?
It goes to show how poor we are in managing our finances. We don’t have savings, and we invest in investment that is not legitimate or scams. When we lose it all to scammers, then we don’t have anything to fall back on – because we don’t have any savings.
Of course everyone wants the fastest way to getting rich, myself included. But bear in mind that investment should be a long-term game. For example you want to build up your retirement fund, and you have 30 years until you hit the retirement age of 60. That means you have time on your side, and still can afford to make mistakes.
Compared with someone in his 50’s and have less than 10 years to retire, he/she needs to invest for a shorter time period and take lesser risk.
So again, get your priorities right when it comes to saving vs investing.
Save Before Invest
That’s why you need to get your priorities right. Save at least 3-6 months of your monthly salary. If your salary is RM5,000 per month, have at least RM15,000 in an emergency fund for rainy days ahead. Best if you can have RM30,000, to better prepare for any emergencies.
If there’s anything that the pandemic has shown us, is that no plan can prepare us for something of that magnitude. Even if you have done the necessary preparation, you should still feel the effects of it.
Let alone those who didn’t have any savings. Thankfully the government came out with many schemes to help us out.
Now you know what to do when faced with the dilemma of saving vs investing?
Invest In A Diversified Portfolio
I’m sure we all have heard of the phrase, “High risk high return”. Which literally means that in order to get a high return, you need to take a high risk.
And I’m also pretty sure that you have heard of “Don’t put all your eggs in one basket”.
Combine the two of them, and you should be investing in a diversified portfolio – some in low-risk instruments (with low returns) such as fixed deposits or money market funds, some in medium-risk instruments (with medium returns) such as unit trust or property, and some in high-risk instruments (with high returns) such as stocks and crypto.
By having a diversified portfolio, should any ‘basket’ were to fall and break all the eggs inside it, you will still have other basket of eggs that can compensate for your loss.
But in the case of saving vs investing – make sure you have some savings first before deciding to invest.
What About The Upcoming Recession Next Year?
In a recent survey on saving vs investing that was carried out by Palindrome Communications, 40 percent of respondents said that they thought that investing is more important in a recession than holding on to cash. 60 percent of the respondents said that holding on to cash is more important than investing.
The data displayed a cautious sentiment among professionals in Malaysia as we head into what might possibly be an upcoming recession. Respondents were made up completely of professionals in the fintech and tech sectors.
Palindrome helps finance companies communicate more effectively in the market. More info here.
Over the years, Malaysian corporations have grown and expanded their business footprint, not only to neighbouring countries, but also to other continents in many parts of the world. It is not uncommon to see many Malaysian companies receiving income from their business and investment ventures in foreign countries, hence we need to understand about the issue of tax on foreign income.
These income sources include sales from exports of goods and services, dividends and interest income from foreign investments, royalty fees from licensing of intangible assets, rental from properties located overseas, and commission from acting as agents.
Generally, income received from out of Malaysia has been exempted from tax. However, in the Budget 2022, the Government announced removal of the tax exemptions on such income.
The rationale quoted for the removal, other than a measure by the Government to raise revenue collection, is that it is a step taken by the country to comply with the global tax standards on harmful tax practices.
Tax On Foreign Income
Malaysia adopts a territorial principle of taxation in that only income accruing in or derived from or received in Malaysia from outside Malaysia, is subject to income tax in Malaysia pursuant to Section 3 of the Income Tax Act, 1967 (ITA). Nevertheless, Malaysian tax residents enjoy tax exemption on the “income received in Malaysia, from outside Malaysia”, also called foreign sourced income (FSI), under Paragraph 28, Schedule 6 of the ITA (Para 8).
In short, while the FSI received by Malaysian tax residents are taxable under the Section 3 of ITA, the amount are exempted under Para 28. (Note: the exemption excludes those engaged in banking, insurance or sea or air transport businesses)
However, not all FSI income received are exempted as it has to be truly “sourced from outside Malaysia”.
Generally, whether the income is sourced within or outside Malaysia would depend on the location where the related income-generating activities had taken place. For example, export sales of goods by a trader are not exempted because the personnel who carried out the various business functions are located in Malaysia.
In contrast, it is argued that interest income from investment funds placed and managed outside the country is foreign sourced and thus, exempt under Para 28.
Tax Treatment On FSI From 1 January 2022
Effective 1 January 2022, the tax exemption for FSI received by Malaysian residents provided for under Para 28 was removed, following the Budget 2022 made on 29 October 2021. The implementation of the legislation is staggered into two remittance timeline of FSI into Malaysia:
January to June 2022 @ 3%:
Taxpayers are given this 6-months transitional period to remit their foreign sourced income in order to enjoy the lower tax on foreign income rate of 3% calculated on the gross income remitted (Part XX, Schedule 1 of the ITA)
Subsequent to 30 June 2022:
Remittance will be subjected to the normal tax rates.
In summary, the tax treatments for the income of a person residing in Malaysia are depicted as follows:
Special Remittance Programme Terminated
In November 2021, the Inland Revenue Board of Malaysia (IRBM) introduced the Special Income Remittance Programme (Program Khas Peremitan Pendapatan or PKPP) to help taxpayers in the transition to the new FSI regime.
The FSI remitted during the PKPP period (between 1 January 2022 and 30 June 2022) would be accepted in good faith by the IRB without any audit nor investigation be conducted on the taxpayer. In addition, there will be no penalties imposed for the remittance during the PKPP period.
However, this programme is shortlived and was revoked on 11 March 2022, as it is deemed not relevant, after the Ministry of Finance (MOF) announced in December 2021 on a concession to exempt certain categories of FSI for a period of five years from 2022 to 2026.
Concession: 1 January 2022 – 31 December 2026
The removal of exemption under Para 28 has been highly debated and criticised with regard to, among others, its timeliness of implementation, vagueness on the scope of FSI, and lack of clarity on claiming of double tax relief if the income had suffered foreign tax.
It is also seen as a stumbling block to attract foreign direct investment (FDI) in Malaysia, thus affecting Malaysia’s competitive position in the global trade map.
On 30 December 2021, MOF made an announcement to defer the full implementation of the new Para 28 to 1 January 2027. The official rules were issued by the Government by way of exemption orders dated 19 July 2022, in the Income Tax (Exemption) (No.5) Order 2022 and Income Tax (Exemption) (No.6) Order 2022 (“Exemption Orders”), applicable to individuals, partners in conventional partnerships, limited liability partnerships (LLP) and companies.
The exemption period granted is from 1 January 2022 to 31 December 2026.
Individuals are exempted on all categories of income including income from employment, dividend, rental and interest. Meanwhile companies and LLPs are exempted on foreign dividend income only.
However, there are the preconditions set in the Exemption Orders to qualify for the exemption during the fi ve years concession period, whereby:
FSIs received by individuals, LLPs and companies “shall have been subjected to tax of a similar character to income tax under the law of the territory which the income arises”.
For foreign dividends received by individuals from conventional partnerships, LLPs and companies, the added condition is that “the highest rate of tax of a similar character to income tax charged under the law of the territory which the income arises at that time is not less than 15%”.
IRBM is to issue the relevant guidelines on the applicable tax treatments, which are yet available at the time of writing. Clearly, taxpayers will need to meet certain conditions to enjoy the tax exemption during the five years concession period as it may not be as straight forward to qualify.
The limelight is now on the IRBM to expedite the issuance of the relevant guidelines, which are expected to provide the much-needed administrative details surrounding the reporting of FSI, including documents required to provide evidence for exemption of FSI, tax calculations of non-exempt FSI, the claiming of double taxation relief on FSI, especially foreign dividends, etc.
Tax Exemption Of FSI From 1 January 2022 To 31 December 2026
Taxable FSI Received By Corporate Investors
For now, FSI other than dividend income received by Malaysian corporate tax residents will be subject to tax in Malaysia. Notably, where the foreign dividends are received by a legal corporate structure other than a company incorporated under the Companies Act 2016, there is no exemption provided during the 5 years period on the income.
A list of the more common situations of tax on foreign income is set out below:
Common Situation Of Taxable FSI
Double Tax Relief On Foreign Tax Suffered
The tax on foreign income received in Malaysia may be reduced by the foreign tax credit paid. Where a Malaysia tax resident has suffered foreign tax on the FSI, the taxpayer is given bilateral or unilateral tax credit relief against the Malaysian tax payable on the same FSI.
Bilateral relief is given under Section 132 of the ITA when the foreign country has a double tax agreement with Malaysia eg Singapore, Indonesia, Japan, China, Australia, South Africa, United Kingdom, France, etc. Under a double tax agreement, a full relief may be possible based on the calculation of a prescribed formula, but the relief amount is only up to the Malaysian tax suffered.
On the other hand, unilateral relief is given under Section 133 of the ITA when there is no or limited double tax agreement by Malaysia with the foreign country eg British Virgin Islands, Taiwan, United States of America, etc. For such relief, the foreign tax recognised is automatically halved.
One is required to substantiate the amount of tax paid overseas with the relevant supporting documents from the tax authorities in the foreign countries, in order to claim the aforementioned tax relief in their tax return.
Capital Receipts Are Non-Taxable
The tax on foreign income will only affect gains that are “income” in nature. Receipts that are “capital” in nature (also known as capital gains) will not be subject to Malaysian tax. Capital gains include proceeds from the disposal of foreign stocks, foreign properties, foreign assets, foreign currencies, and foreign investment papers. However, these assets have been held as long-term investments.
Whether the gains are “income” or “capital” in nature, the onus of proof lies with the taxpayers. If the remittances are found to be income in nature instead of capital as claimed by the taxpayers, the same shall be subject to income tax.
Action Plan
The year 2022 marks an impact on investors with foreign asset holdings, in navigating a new tax landscape going forward with the removal of tax exemption under Para 28. The imminent measures include evaluation of the financial returns on their existing overseas investments, net of all tax costs. In sourcing new investment opportunities overseas, such investors shall need to factor in the additional tax costs in Malaysia.
Here are a few suggestions on the action that affected investors should look into:
1) Review the Malaysian tax impacts on all taxable FSI from investments outside Malaysia- tax simulations may be useful for the investment selection process.
2) Maintain proper records of the foreign assets, including tracking of the funds retained in foreign bank accounts vis-à-vis those repatriated to Malaysia. On the amount remitted into Malaysia, ascertain the nature as to whether they belong to “income” or “capital”, which will have different tax implications.
3) Where the funds are mixed, distinguish between foreign source income and domestic source income for proper reporting of taxable income for Malaysian tax purposes.
4) Conduct a comprehensive review of the current investment structure and strategise the most optimal approach to undertake future investments. This review may involve international tax planning to mitigate tax exposure involving multiple countries.
5) Examine the existing intercompany loans and undertake possible steps, including debt restructuring exercises, or rescheduling repayments to reduce the tax impact on remittance of interest income into Malaysia. On this note, any proposed changes will need to include transfer pricing considerations to avoid tax pitfalls in the future.
If guidance is required on the issue of tax on foreign income, consider seeking professional advice from a tax consultant. This would help you avoid stepping into potential tax landmines that could be uncovered in the future, when the company is audited by the IRBM.
The renminbi has depreciated by about 8% against the US dollar so far this year and, at RMB6.96 per US dollar, is already homing in on our year-end target of RMB7 per US dollar.
China’s central bank, the People’s Bank of China (PBoC), has begun to resist further depreciation, cutting its reserve requirement by two percentage points to 6% last week and setting the daily fix for the official exchange rate at stronger-than-expected rates in recent days. But with the US dollar still surging and probable recessions in most developed markets set to weigh heavily on external demand, there is a clear risk that the exchange will overshoot to somewhere in the region of RMB 7.10-7.20 per US dollar.
A weaker renminbi is often associated with delivering a deflationary impulse to the rest of the world. After all, as the currency depreciates, imports of Chinese goods become cheaper for the rest of the world. So has the recent depreciation of the renminbi relieved pressure on global central banks in their quest to tame inflation?
There certainly does appear to be a link between movements in the renminbi and rates of inflation experienced by its trading partners. For example, as the charts below show, US import prices from China fluctuate with the exchange rate. And these import prices are closely correlated with core goods inflation in the US. This makes intuitive sense, and similar relationships are observed in other economies, such as the eurozone.
However, there are a couple of reasons to doubt that renminbi depreciation has solved the global inflation crisis.
For a start, the correlation between currency movements and prices only applies to the core goods portion of inflation in other countries.
The renminbi has no major impact on other key drivers such as owners equivalent rent, local services or indeed international commodity prices, all of which account for the bulk of inflation in markets such as the US.
As such, the relationship between the renminbi and headline inflation, in this instance in the US, is relatively weak, with several periods of currency volatility failing to follow through into headline inflation.
More generally, we need to be careful about assuming that correlation means causation. After all, the renminbi tends to be very cyclical. When exports are growing strongly, the currency tends to appreciate, and when exports are coming off – as is the case now – the currency tends to depreciate. And, of course, when global demand is strong, China’s exports are performing well, and the renminbi appreciates, firms can pass on higher costs to consumers and fuel inflation.
On this basis, global inflation dynamics are still a function of the strength of demand and movements in the renminbi are largely a by-product of its impact on trade. Indeed, an expected slowdown in exports as demand for manufactured goods softened has been a key reason for our bearish view of the renminbi since the start of the year.
The upshot is that, barring an unlikely large one-off depreciation, the weaker renminbi neither significantly changes global inflation dynamics nor needs developed market central banks to keep raising interest rates.
About the Author
David Rees, Senior Emerging Markets Economist, Schroders
Investment is a very hot topic among us Malaysians. If there’s one investment that has been picking up in recent years, it is peer-to-peer financing, or better known as P2P financing.
In a nutshell, P2P financing – a type of digital financing – is an alternative financing raised through crowdfunding that allows businesses to get financing from individuals via a digital platform. Smart Investor speaks to Chai Kien Poon, Country Head of Funding Societies Malaysia, the largest SME digital financing platform in Southeast Asia.
Inflation Is Rising Fast
Chai Kien Poon, Country Head of Funding Societies Malaysia
Investors and businesses alike are facing great challenges due rising inflation. Latest figures show that Malaysia’s inflation has increased by 3.4% to 127.4 in June 2022 from 123.2 in the same month of the preceding year. The Food Index has increased by 6.1% and remained as the main contributor to the rise in inflation during the month of June 2022. This results in a lower purchasing power and greater pressure to increase one’s income.
Concerns surrounding inflation are coupled with the heightened uncertainties brought forward by geopolitical conflicts and other global issues. Hence, investment diversification is more crucial than ever to maintain a stable portfolio.
“The P2P financing, or SME digital financing portfolios, are not publicly traded and hence, sheltered from daily market fluctuations. SMEs will still be making fixed repayments regardless of short term FTSE Bursa Malaysia KLCI movements or interest rate fluctuations,” Chai says.
With a variety of SME debt investments offered on digital financing platforms, it can cater to investors with different investment objectives and risk appetites. It is a win-win situation too, as investors will be able to directly support local SMEs needing additional working capital for further growth or meet cash flow requirements, and earn returns.
“Businesses can expect a more challenging period ahead, driven by persistent supply chain disruptions, inflation (rising wage and materials costs) and longer repayment cycle from customers. This has put pressure on margins (as cost increases while consumers lose purchasing power) and impacted cash flows,” says Chai.
To some extent, a rising rate environment also leads to higher monthly payments (for variable rates financing), adversely impacting SMEs’ overall expenses and pose a threat to their cash flow. Moving forward, lenders such as traditional financial institutions may also tighten their lending criteria.
Subsequently, this will lead to a larger group of creditworthy SMEs to be further underserved, or unserved as the already significant SME financing gap continues to widen during this critical moment as businesses return to their full economic potential.
Why Should Malaysians Invest In Digital Financing?
“Malaysians are more familiar with equity investments: stock market, unit trusts, etc. On Bursa Malaysia, there are about 1,200 publicly listed companies being traded,” shares Chai.
“In contrast, there are 1.2 million micro, small and medium enterprises (MSMEs) in the country, and a huge bulk of these numbers are always looking for financing opportunities to fulfill their business obligations and objectives.”
These underserved, yet creditworthy MSMEs turn to Funding Societies to seek tailored financing solutions for their businesses. They represent a large volume of potential transactions which investors can invest in, and receive the principal invested plus returns upon the maturity or repayment of the financing facilities.
To protect investors, rigorous rounds of background checks are performed based on proprietary evaluation matrices before approval for financing, while simultaneously raising the investment notes for investors.
As we are now in a period of heightened uncertainty, Funding Societies is constantly innovating to offer more investment products to meet the needs of investors’ investment objectives and risk appetite across business cycles.
Its recently launched Guaranteed Investment Notes (GIN) offer more consistent (albeit lower returns), where the non-repayment or default risk are guaranteed by an appointed guaranteeing entity instead of the investors themselves. This may appeal to investors having a more cautious outlook in the short to medium time horizon.
By having less disposable income, we will be more cautious with our investment – often looking for the diamonds in the rough. So, how well are the businesses being filtered before they are on-boarded onto the digital financing platform?
“When SMEs submit an application through the digital platform, they will be assessed through our Know-Your-Clients (KYC) process that identifies and validates the SME’s existence and business, and its proprietors or directors,” Chai explains.
Credit and risk assessment on an SME is based on a combination of factors which includes financials, nonfinancials, and behavioral data. A risk rating will then be generated for each SME. Only qualified SMEs will be placed on Funding Societies’ platform for the crowdfunding process. A
s for investors, the investments start from as low as RM100 per note. To help investors build a diversified portfolio, investors can limit their exposure to each SME on the platform via the website and mobile application.
Moreover, investors are also provided with a factsheet which they can refer to evaluate the investment opportunities further. These factsheets include information like tenure, paid-up capital, SME credit score, payment behavior, entity type, and number of guarantors.
Digital Financing Is Booming
Launched in 2015, Funding Societies has been doing very well and has since achieved a lot of success. Some of their notable milestones within this year include crossing the RM1 billion in financing disbursement in Malaysia, its multi-million Series C+ fundraise, its investment in Indonesia’s Bank Index, its expansion into Vietnam as the Group’s latest market entry, as well as its acquisition of regional payment solutions provider, CardUp.
Along with these accomplishments, Funding Societies Malaysia also introduced more new products including the Islamic Trade Financing and BizFund, an enhanced SME-focused term financing product. In terms of businesses, the digital financing platform saw more than 60% increase in MSMEs compared to the same period in 2021. During the same period, total disbursements also grew by more than 60% compared to the same period last year.
As for investors, in the first half of 2022, there was around 10% increase in investors compared to the first half of 2021. Over 60% of its investors comprise Millennials and Gen Zs, with more than 40% of the investors are based in the Klang Valley.
In just seven years, the platform has helped finance over five million business deals, with over RM11 billion in funding. What is even greater, Funding Societies’ default rate remains stable – between 2% to 3% – despite having to navigate the pandemic for the past few years.
Minimising Risks While Maximising Gains
Rainbow Chan
The ‘high risk, high return’ concept rings true when it comes to investment. But with technology on our side, here’s what existing investors have to say about digital financing investment:
“I wanted to diversify into a more convenient asset class, something which I can monitor using a device. After investing through Funding Societies, I find it to be a platform that empowers users to direct their own funds, minimise risks, while maximising the gains. Returns are predictable and stable, such as with the Guaranteed Investment Notes (GIN). Funding Societies is a great place to start your second stream of income without much hassle or big capital,” says investor, Rainbow Chan.
Getting The Much-Needed Capital Without Much Hassle
As for the SMEs, digital financing has certainly helped in getting capital in a much easier and faster way.
“We saw an increase in our sales during the pandemic and needed to increase our inventory to cater to these demands. Having been turned down by traditional financial institutions, we turned to Funding Societies for a term financing. We found the application process to be smooth and seamless and we were able to receive the capital that we needed to replenish our stocks quite fast,” say Abdul Hadi Wisman, Co-Founder & CEO of Sellection Sdn Bhd, a 5-year-old e-Commerce retailer selling imported branded handbags and leather accessories.
Looking For Guaranteed Returns?
Going forward, Funding Societies intends on focusing on providing more Guaranteed Investment Notes (GIN) for investors. GIN is Funding Societies’ first investment product that provides investors with guaranteed principal and interest returns on their investments.
Investors can start with a minimum investment amount of RM100 for a duration of between one to 24 months. GIN investors can enjoy net returns of up to 6% per annum before fees.
The platform is also looking to expand their offerings to include Shariah-compliant financing and investment opportunities. Following the launch of its Islamic trade financing facility in May, there were encouraging responses and high demand on the expansion of Shariah-compliant products, both from the SMEs as well as investors’ sides.
This is in line with the Islamic ECF and financing markets’ performance last year, which saw RM225.9 million being raised. For comparison, only RM1.5 million was raised through this avenue in the previous year.
For those on the lookout to diversify their investments and are considering alternative investment options, it is definitely worth taking a closer look at what digital financing has to offer. Just make sure you do your due diligence and understand the risks involved before diving in. Perhaps start small, just to get your feet wet, and take it from there.
